A CRO at an investment bank has asked the risk department to evaluate the bank’s derivative position with a counterparty over a 3-year period. The risk department assumes that the counterparty’s default probability follows a constant hazard rate process. The table below presents trade and forecast data on the CDS spread, the expected exposure, and the recovery rate of the counterparty: Additionally, the CRO has presented the risk team with the following set of assumptions to use in conducting the analysis: The investment bank and the counterparty have signed a credit support annex to cover this exposure, which requires collateral posting of AUD 11 million. The current risk-free rate of interest is 3% and the term structure of interest rates remains flat over the 3-year horizon. The collateral and the expected positive exposure values remain stable as projected over the 3-year life of the contract. The expected positive exposure and the collateral are assessed by using the same discount factors. The probability of default of the bank is 0% per year. Given the information and the assumptions above, what is the correct estimate of the unilateral CVA for this position? AUD 0.214 million AUD 0.253 million AUD 0.520 million AUD 0.998 million #FRMLevel2 #RiskManagement #FinancialRisk #FRMExamPrep #RiskMeasurement #cva #creditvalueadjustment #xva #creditrisk #frm #frmexam #FRMLevel2CVACreditValueAdjustment #CVACalculation #counterpartyrisk #financialriskmanagement #CounterpartyExposure